Foreign Exchange Research

Global Foreign Exchange Strategy

3 June 2013

The FX Quantitative Analyzer

Yuki Sakasai
+1 212 412 5652
yuki.sakasai@barclays.com

www.barclays.com

High-beta currencies came under pressure last week, driven by interest rates and lower
commodity prices with US data coming in broadly on the stronger side. The moves in
low-yielding currencies were more muted, however, despite our Financial Fair Value (FFV)
model implying a small EUR depreciation. Our model continues to show a significant
undervaluation of the AUD and NZD against the USD and a substantial undervaluation of
the SEK against the EUR, suggesting a near-term risk of correction in these currency pairs.
With the Fed firmly data dependent on its next move, the outcome of the US May
employment report on Friday will be critical for the prospect of the USD. Although we do
not expect any major announcement, a series of central bank decisions with the RBA on
Tuesday and the BoE and ECB on Thursday are also worth attention as a risk event for
each currency.

CHART OF THE WEEK

Weekly percentage changes in spot and FFV

2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
USD/CAD

NZD/USD
USD/JPY

AUD/USD
EUR/GBP

EUR/CHF

EUR/NOK

EUR/SEK
EUR/USD

actual FFV
Source for all charts and tables: Barclays Research

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 19
Barclays | The FX Quantitative Analyzer

SUMMARY 1
SPOT
Deviation from Market
fair value sentiment Risk premium Momentum

% No. of SD Signal No. of SD Signal No. of SD Signal No. of SD

EUR/USD -2.0 -1.4 Bearish -0.1 High 0.4 Overbought 1.5
USD/JPY 3.5 0.8 Bearish -1.4 Low -2.0 Overbought 2.0
EUR/GBP 2.0 1.1 Bullish 1.6 Low -0.6 Overbought 1.6
EUR/CHF 1.2 0.8 Bullish 0.6 Low -0.9 Overbought 0.8
USD/CAD 1.0 0.7 Bullish 0.5 Low -1.7 Oversold -0.4
AUD/USD -4.5 -2.8 Bullish 0.0 High 3.1 Overbought 0.0
NZD/USD -2.0 -2.0 Bearish -0.2 Overbought 0.9
EUR/NOK 1.3 1.1 Bearish -0.4 Overbought 1.6
EUR/SEK 3.0 2.1 Bullish 0.1 Overbought 0.4
Note: All the measures refer to the crosses rather than the specific currencies. The blue shaded area shows extreme overbought conditions, while the grey shaded
area shows extreme oversold conditions. The notional of standard deviation shows the strength of each signal, as well as the direction of deviation.

High-beta currencies came under pressure last week, driven by lower commodity prices with US data coming in broadly on the
stronger side. The moves in low-yielding currencies were more muted, however, despite our Financial Fair Value (FFV) model
implying a small EUR depreciation.

Our model continues to show a significant undervaluation of the AUD and the NZD against the USD and a substantial
undervaluation of the SEK against the EUR, suggesting a near-term risk of correction in these currency pairs.

With the Fed firmly data dependent on its next move, the outcome of the US May employment report on Friday will be critical for
the prospect of the USD. Although we do not expect any major announcement, a series of central bank decisions with the RBA
on Tuesday and the BoE and ECB on Thursday are also worth attention as a risk event for each currency.

VOL
Vol valuation
Vol valuation (Principal Component Analysis) (GARCH) Strangle value

3m vol 6m vol 9m vol 12m vol 3m vol 3m

EUR/USD Cheap Fair Cheap Cheap Low Low

USD/JPY Cheap Cheap Cheap Cheap High Low
EUR/GBP Cheap Cheap Cheap Cheap Fair Low
EUR/CHF Cheap Expensive Expensive Cheap High Low
USD/CAD Cheap Fair Fair Fair High Average
AUD/USD Cheap Expensive Expensive Expensive High Low

There are few misvaluations along the term structure based on our PCA model.

1
All analysis in this report is based on data available up to last Fridays close.

3 June 2013 2
Barclays | The FX Quantitative Analyzer

EUR/USD SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

8 3m LIBOR sprd d(3m LIBOR sprd)

d(1Y-3m sprd) d(10Y-1Y sprd)
6 EUR overvalued 1.5 dlog(rel equity returns) dlog(MSCI world)
4 dlog(WTI)
1.0
2
0.5
0

-2 0.0
EUR undervalued
-4
-0.5
24-Aug

19-Oct

5-Apr
1-Jun

27-Jul

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
-1.0
% deviation from FV stdev(+2) stdev(-2)
3-May 10-May 17-May 24-May 31-May

EUR/USD is trading below our fair value estimate, but the deviation The rise in spot (0.2%) was in contrast to the fall in FFV (-0.8%),
is not significant yet. which was mainly driven by interest rates (-0.6%).

Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

0.0
4
-0.2 2
EUR bullish sentiment EUR risk premium low
-0.4 0

-0.6 -2
-4
-0.8
-6
-1.0
EUR bearish sentiment -8
EUR risk premium high
-1.2 -10
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May

16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr
1-Jun

3-May
8-Mar

31-May
Skewness stdev(+2) stdev(-2) mean Risk Premium stdev(+2) stdev(-2)

The option-implied sentiment on the EUR is close to its historical There is little risk premium attached to the EUR.
average.
Market positions (EUR) Momentum

10 EUR overbought
extended EUR longs
0.4 5
0
0.2
-5
0.0
-10
-0.2
-15
-0.4 -20
extended EUR shorts EUR oversold
-0.6 -25
30-Oct
10-Jul

7-Aug

2-Oct

19-Feb
4-Sep

27-Nov

16-Nov
16-Apr
12-Jun

14-May

29-Jun
22-Jan

24-Aug

19-Oct

11-Jan

8-Feb
25-Dec

14-Dec
27-Jul

21-Sep

5-Apr

3-May
1-Jun
19-Mar

8-Mar

31-May

CFTC net long/open interest stdev(+2) stdev(-2) Momentum stdev(+2) stdev(-2)

The market continued to add net short EUR speculative positions. EUR momentum is showing an overbought condition.

3 June 2013 3
Barclays | The FX Quantitative Analyzer

EUR/USD VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol, and GARCH forecast

2.0 25
Implied 3-m vol
1.5
historical 3-m vol
1.0
20 forecasted 3-m vol, GARCH(1,1)
0.5
0.0
-0.5 15

-1.0
-1.5 10
-2.0
1m 2m 3m 6m 9m 1y 2y

PCA z-score stdev(+1.64) stdev(-1.64) 5

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vol is below our GARCH(1,1) model, but above realized vol.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

9.0 1.2 14%

Implied Probability
8.0 Distribution 1.1 13%
1.0
7.0 12%
0.9
6.0 Lognormal PDF
0.8 11%
5.0 0.7 10%
4.0 0.6
9%
0.5
3.0 8%
0.4
2.0 0.3 7%
1-Aug

1-Oct
1-Jul

1-Feb
1-Nov

1-Apr

1-May
1-Jun

1-Jan
1-Sep

1-Dec

1-Mar
1.0
22.75% 31.48%
0.0
0.96

1.01

1.07

1.12

1.17

1.22

1.27

1.32

1.37

1.42

1.47

1.52

1.57

1.62

Kurtosis (LHS) ATM Implied Vol (RHS)

The market attaches a 22.75% probability that spot will be below The implied volatility and the markets pricing of fat-tail have
1.26 in three months and sees a 31.48% likelihood that it will stabilized.
exceed 1.33 (Reference 3m-fwd: 1.297 1 st dev).
Forward-forward implied volatility curve Implied and actual correlation

10.0 60%

40%
9.5
20%
9.0
0%

8.5 -20%

-40%
8.0
-60%
2009

2010

2011

2012

7.5
3m Today 3m-3m F 3m-6m F 3m-9m F
Implied 3-m correlation between EUR/USD and JPY/USD
31-May-13 24-May-13 17-May-13
90 day rolling actual correlation

The forward volatility curve has little changed over the past week. The implied correlation between EUR/USD and JPY/USD is stronger
than realized correlation.

3 June 2013 4
Barclays | The FX Quantitative Analyzer

USD/JPY SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

3m LIBOR sprd d(3m LIBOR sprd)

7 d(1Y-3m sprd) d(10Y-1Y sprd)
JPY undervalued
2.5 dlog(rel equity returns) dlog(MSCI world)
5
dlog(WTI)
3
1.5
1

-1 0.5
-3
JPY overvalued
-5 -0.5
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
14-Dec

5-Apr
1-Jun

27-Jul

21-Sep

3-May
8-Mar

31-May
-1.5
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

USD/JPY is trading above our fair value estimate, but deviation is not The fall in spot (-0.2%) was in line with the decline in FFV (-0.2%),
significant yet. with interest rates (1.4%) and oil prices (0.2%) offset by relative
equity returns (-1.8%).
Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

15
0.5 JPY bearish sentiment
JPY risk premium high
10
0.3
5
0.1
0
-0.1
-5
-0.3 JPY bullish sentiment JPY risk premium low
-10
-0.5
24-Aug

19-Oct
1-Jun

27-Jul

5-Apr
16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan
8-Feb
27-Jul

21-Sep

14-Dec

5-Apr
3-May
1-Jun

8-Mar

31-May

Risk Premium stdev(+2) stdev(-2)

Skewness stdev(+2) stdev(-2) mean

The option-implied sentiment toward JPY remains modestly bullish. The risk premium attached to the JPY remains low.
Market positions (JPY) Momentum
30
-0.6 extended JPY shorts
25
-0.4 JPY oversold
20
-0.2 15
10
0.0
5
0.2
0
0.4 extended JPY longs -5 JPY overbought
-10
0.6
24-Aug

19-Oct
1-Jun

27-Jul

5-Apr
16-Nov
29-Jun

8-Mar

31-May
11-Jan
8-Feb
21-Sep

14-Dec

3-May
30-Oct
10-Jul

7-Aug

2-Oct

19-Feb
4-Sep

27-Nov

16-Apr
12-Jun

14-May
22-Jan
25-Dec

19-Mar

CFTC net long/open interest stdev(+2) stdev(-2) Momentum stdev(+2) stdev(-2)

The market slightly added net short JPY positions. JPY momentum is indicating an oversold condition.

3 June 2013 5
Barclays | The FX Quantitative Analyzer

USD/JPY VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol, and GARCH forecast

2.0 25
Implied 3-m vol
1.5 historical 3-m vol
1.0 forecasted 3-m vol, GARCH(1,1)
20
0.5
0.0
-0.5 15

-1.0
-1.5
10
-2.0
1m 2m 3m 6m 9m 1y 2y

PCA z-score stdev(+1.64) stdev(-1.64) 5

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vols are significantly above our GARCH (1,1) forecast.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

0.08 1.0 14%

Implied Probability
0.07 Distribution 0.9 13%

0.8 12%
0.06
Lognormal PDF 11%
0.05 0.7
10%
0.04 0.6
9%
0.5 8%
0.03
0.4 7%
0.02
0.3 6%
0.01
1-Nov

1-Apr
1-Jun

1-Aug

1-Oct

1-Jan
1-Jul

1-Sep

1-Dec

1-Mar
1-Feb

1-May
12.74% 10.24%
0.00
61.1

67.0

72.9

78.8

84.7

90.6

96.5

102.4

108.3

114.2

120.2

126.1

132.0

137.9

Kurtosis (LHS) ATM Implied Vol (RHS)

The market attaches a 12.74% probability that spot will move below Implied vol has risen, while the market pricing of fat-tail risks
92.69 in three months and a 10.24% probability that it will move above remains subdued.
109.17 (Reference 3m-fwd: 100.9 1 st dev).
Forward-forward implied volatility curve Implied and actual correlation

13.5 60%

13.0 40%
12.5 20%
12.0 0%
11.5 -20%
11.0
-40%
10.5
-60%
2009

2010

2011

2012

10.0
3m Today 3m-3m F 3m-6m F 3m-9m F
Implied 3-m correlation between EUR/USD and JPY/USD
31-May-13 24-May-13 17-May-13
90 day rolling actual correlation

The forward-forward implied-volatility curve has shifted higher at all The implied correlation between EUR/USD and JPY/USD is stronger
tenors. than realized correlation.

3 June 2013 6
Barclays | The FX Quantitative Analyzer

EUR/GBP SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

4 3m LIBOR sprd d(3m LIBOR sprd)

3 d(1Y-3m sprd) d(10Y-1Y sprd)
GBP undervalued 0.8 dlog(rel equity returns) dlog(MSCI world)
2
dlog(WTI)
1
0
0.3
-1
-2
-3 GBP overvalued -0.2
-4
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
-0.7
3-May 10-May 17-May 24-May 31-May
% deviation from FV stdev(+2) stdev(-2)

EUR/GBP is trading above our fair value estimate, but the deviation The rise in spot (0.1%) was in contrast to the fall in FFV (-0.4%),
is not significant yet. which is mainly driven by interest rates (-0.3%).
Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

0.4 4
GBP bearish sentiment
0.2 2 GBP risk premium high
0.0 0
-0.2 -2
-0.4 -4
-0.6 -6
GBP bullish sentiment
-0.8 -8 GBP risk premium low
-1.0 -10
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr
1-Jun

3-May
8-Mar

31-May

16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May
Skewness stdev(+2) stdev(-2) mean Risk Premium stdev(+2) stdev(-2)

The option-implied sentiment for the GBP relative to the EUR The risk premium attached to the GBP relative to the EUR is close
remains modestly bearish. to its historical average.
Market positions (EUR GBP adjusted for contract size) Momentum

10
0.4 GBP oversold
extended GBP shorts
5
0.2
0
0.0
-5
-0.2
-10
-0.4 extended GBP longs GBP overbought
-15
-0.6 -20
7-Aug

2-Oct

27-Nov

16-Apr
12-Jun

30-Oct

22-Jan
10-Jul

25-Dec

19-Mar
19-Feb
4-Sep

14-May

24-Aug

19-Oct
1-Jun

27-Jul

5-Apr
16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May

CFTC net long/open interest stdev(+2) stdev(-2) Momentum stdev(+2) stdev(-2)

The market slightly added a net long GBP speculative position The GBP bearish momentum is showing an oversold condition.
against EUR.

3 June 2013 7
Barclays | The FX Quantitative Analyzer

EUR/GBP VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol, and GARCH forecast

2.0 24
Implied 3-m vol
1.5 historical 3-m vol
1.0 19 forecasted 3-m vol, GARCH(1,1)
0.5
0.0
14
-0.5
-1.0
-1.5 9
-2.0
1m 2m 3m 6m 9m 1y 2y

PCA z-score stdev(+1.64) stdev(-1.64) 4

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vol is in line with our GARCH (1,1) volatility forecast, but
above realized vol.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

16 10%
Implied Probability
1.4 10%
14 Distribution
1.2 9%
12 9%
Lognormal PDF 1.0 8%
10
8%
0.8
8 7%
0.6 7%
6
6%
0.4
4 6%
0.2 5%
2
1-Nov

1-Apr
1-Jun

1-Aug

1-Oct

1-Jan
1-Jul

1-Sep

1-Dec

1-Mar
1-Feb

1-May
18.85% 16.16%
0
0.67

0.70

0.73

0.75

0.78

0.81

0.84

0.86

0.89

0.92

0.95

0.97

1.00

1.03

Kurtosis (LHS) ATM Implied Vol (RHS)

The market assigns a 18.85% probability that spot will be below Implied volatility has fallen, while the market pricing of fat-tail risk
0.83 in three months and a 16.16% likelihood that it will be above remains stabilized.
0.88 (Reference 3m-fwd: 0.856 1 st dev).
Forward-forward implied volatility curve Implied and actual correlation

8.1 80%

7.9
60%
7.7
7.5
40%
7.3
7.1 20%
6.9
0%
6.7
2009

2010

2011

2012

6.5
3m Today 3m-3m F 3m-6m F 3m-9m F Implied 3-m correlation between EUR/GBP and EUR/USD
90 day rolling actual correlation
31-May-13 24-May-13 17-May-13

The forward volatility curve has moved lower over the week. The implied correlation between EUR/GBP and EUR/USD is weaker
than the realized correlation.

3 June 2013 8
Barclays | The FX Quantitative Analyzer

EUR/CHF SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

3 3m LIBOR sprd d(3m LIBOR sprd)

0.4 d(1Y-3m sprd) d(10Y-1Y sprd)
2 CHF undervalued dlog(rel equity returns) dlog(MSCI world)
1 dlog(WTI)
0.2
0

-1 0.0
-2 CHF overvalued
-3 -0.2
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
-0.4
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

EUR/CHF is trading above our fair value estimate, but the deviation The rise in spot (0.1%) was in contrast to the fall in FFV (-0.2%),
is not significant yet. which is mainly driven by relative equity returns (-0.1%).
Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

3.5 CHF bearish sentiment 5

CHF risk premium high
2.5 4
1.5 3
0.5 2
-0.5 1
-1.5 0
-2.5 -1
CHF bullish sentiment CHF risk premium low
-3.5 -2
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May

16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May
Skewness stdev(+2) stdev(-2) mean Risk Premium stdev(+2) stdev(-2)

The option-implied sentiment toward the CHF relative to the EUR The risk premium attached to the CHF relative to the EUR remains
has been steady and bearish for the past few months. low.
Market positions (EUR-CHF adjusted for contract size) Momentum

0.4 12
0.3 10
extended CHF shorts CHF oversold
0.2 8
0.1 6
0.0 4
-0.1 2
-0.2 0
-0.3 -2
-0.4 extended CHF longs -4 CHF overbought
-0.5 -6
30-Oct

16-Nov
10-Jul

29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
7-Aug

2-Oct

19-Feb

27-Jul

21-Sep

14-Dec

5-Apr

3-May
4-Sep

27-Nov

1-Jun
16-Apr
12-Jun

14-May
22-Jan
25-Dec

8-Mar

31-May
19-Mar

CFTC net long/open interest stdev(+2) stdev(-2) Momentum stdev(+2) stdev(-2)

The market slightly reduced the net long CHF speculative position CHF bearish momentum is indicating an oversold condition.
against the EUR.

3 June 2013 9
Barclays | The FX Quantitative Analyzer

EUR/CHF VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol, and GARCH forecast

2.0 35 Implied 3-m vol

1.5 historical 3-m vol
30
1.0 forecasted 3-m vol, GARCH(1,1)
0.5 25

0.0 20
-0.5
15
-1.0
-1.5 10
-2.0
1m 2m 3m 6m 9m 1y 2y 5

PCA z-score stdev(+1.64) stdev(-1.64) 0

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vol is above our GARCH forecast and realized vol.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

16 14.2 8%
Implied Probability
14 Distribution 12.2 7%

10.2 6%
12
Lognormal PDF 5%
8.2
10 4%
6.2
8 3%
4.2 2%
6
2.2 1%
4
0.2 0%
2
1-Nov

1-Apr
1-Jun

1-Jan
1-Aug

1-Oct
1-Jul

1-Sep

1-Dec

1-Mar
1-Feb

1-May
41.85% 28.15%
0
1.00

1.04

1.08

1.11

1.15

1.18

1.22

1.26

1.29

1.33

1.36

1.40

1.44

1.47

Kurtosis (LHS) ATM Implied Vol (RHS)

The market places a 41.85% probability that spot will be below Implied volatility remains elevated, while the markets pricing of
1.22 in three months and a 24.72% probability that it will be above fat-tail risk has fallen.
1.25 (Reference 3m-fwd: 1.236 1 st dev).
Forward-forward implied volatility curve Implied and actual correlation

7.0 80%

6.5 60%

6.0 40%

5.5 20%

5.0 0%

4.5 -20%

4.0 -40%
2009

2010

2011

2012

3.5
3m Today 3m-3m F 3m-6m F 3m-9m F Implied 3-m correlation between EUR/USD and EUR/CHF
90 day rolling actual correlation
31-May-13 24-May-13 17-May-13

The forward volatility curve has become more inverted over the The actual correlation between the EUR/USD and EUR/CHF is
week. higher than the implied correlation.

3 June 2013 10
Barclays | The FX Quantitative Analyzer

USD/CAD SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

4 3m LIBOR sprd d(3m LIBOR sprd)

CAD undervalued d(1Y-3m sprd) d(10Y-1Y sprd)
3
dlog(rel equity returns) dlog(MSCI world)
1.0
2 dlog(WTI)
1
0 0.5

-1
-2 0.0
CAD overvalued
-3
-4 -0.5
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
-1.0
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

USD/CAD is trading above our fair value estimate, but the deviation The rise in spot (0.1%) was smaller than the rise in FFV (0.7%),
is not significant yet. which was mainly driven by interest rates (0.4%) and oil prices
(0.2%).
Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

1.0 3
0.9 2 CAD risk premium high
CAD bearish sentiment
0.8 1
0.7 0
0.6 -1
0.5 -2
-3
0.4
-4
0.3
-5
0.2 -6 CAD risk premium low
0.1 CAD bullish sentiment
-7
0.0 -8
16 Nov
29 Jun

24 Aug

19 Oct

11 Jan
21 Sep

14 Dec

5 Apr
1 Jun

27 Jul

8 Mar

31 May
8 Feb

3 May

24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
Skewness stdev(+2) stdev(-2) mean Risk Premium stdev(+2) stdev(-2)

The option-implied sentiment on the CAD is slightly bearish. The risk premium attached to the USD relative to the CAD remains
low.
Market positions (CAD) Momentum

-1.0 10
-0.8 8
extended CAD shorts
-0.6 6 CAD oversold
-0.4 4
-0.2
2
0.0
0
0.2
0.4 -2
0.6 -4
extended CAD longs CAD overbought
0.8 -6
1.0 -8
30-Oct
10-Jul

7-Aug

2-Oct

19-Feb

16-Nov
4-Sep

27-Nov

29-Jun
16-Apr

11-Jan

8-Feb
12-Jun

14-May

24-Aug

19-Oct
22-Jan

27-Jul

21-Sep

14-Dec

5-Apr

3-May
25-Dec

1-Jun
19-Mar

8-Mar

31-May

CFTC net long/open interest stdev(+2) stdev(-2) Momentum stdev(+2) stdev(-2)

The market slightly reduced its net short CAD speculative positions. The CAD momentum is close to neutral.

3 June 2013 11
Barclays | The FX Quantitative Analyzer

USD/CAD VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol and GARCH forecast

2.0 29 Implied 3-m vol

1.5 historical 3-m vol
1.0 24
forecasted 3-m vol, GARCH(1,1)
0.5
0.0 19
-0.5
-1.0 14
-1.5
-2.0 9
1m 2m 3m 6m 9m 1y 2y

PCA z-score stdev(+1.64) stdev(-1.64) 4

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vol is above our realized vol and our GARCH (1,1) estimate.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

14 Implied Probability 1.8 13%

Distribution 12%
12 1.6
Lognormal PDF 11%
10 1.4
10%

8 1.2 9%
8%
1.0
6
7%
0.8
4 6%
0.6 5%
2
1-Aug

1-Oct
1-Jul

1-Feb
1-Nov

1-Apr

1-May
1-Jun

1-Jan
1-Sep

1-Dec

1-Mar
36.08% 30.83%
0
0.80

0.83

0.87

0.90

0.94

0.98

1.01

1.05

1.08

1.12

1.16

1.19

1.23

1.26

Kurtosis (LHS) ATM Implied Vol (RHS)

The market sees a 36.08% probability that spot will be below 1.02 in The implied volatility has stabilized at a higher level, while the
three months, versus a 30.83% likelihood that it will be above 1.05 market pricing of fat-tail risk has fallen.
(Reference 3m-fwd: 1.036 1 st dev).
Forward-forward implied volatility curve Implied and actual correlation

8.4 80%
8.2 70%
60%
8.0
50%
7.8 40%
30%
7.6
20%
7.4 10%
7.2 0%
2009

2010

2011

2012

7.0
3m Today 3m-3m F 3m-6m F 3m-9m F Implied 3-m correlation between CAD/USD and EUR/USD
90 day rolling actual correlation
31-May-13 24-May-13 17-May-13

The forward-forward volatility has flattened lower over the past The implied correlation between the CAD/USD and EUR/USD is
week. stronger than the actual correlation.

3 June 2013 12
Barclays | The FX Quantitative Analyzer

AUD/USD SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

4 3m LIBOR sprd d(3m LIBOR sprd)

3 d(1Y-3m sprd) d(10Y-1Y sprd)
AUD overvalued
1.5 dlog(rel equity returns) dlog(MSCI world)
2
dlog(CRB)
1 1.0
0
0.5
-1
-2 0.0
-3 AUD undervalued -0.5
-4
-1.0
-5
-1.5
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
-2.0
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

AUD/USD is trading significantly below our fair value estimate. The fall in spot (-0.9%) was larger than the fall in FFV
(-0.4%), which was driven mainly by interest rates (-0.2%) and
CRB (-0.2%).
Market sentiment (skewness of prob. distrib. of return) Risk premium (from uncovered interest parity)

10
-0.4 8 AUD risk premium low
-0.5 6
AUD bullish sentiment
-0.6
4
-0.7
-0.8 2
-0.9 0
-1.0 -2
-1.1
-4
-1.2 AUD bearish sentiment AUD risk premium high
-1.3 -6
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May

Skewness stdev(+2) stdev(-2) mean Risk Premium stdev(+2) stdev(-2)

The option-implied bullish sentiment on AUD is close to its long run The risk premium attached to the AUD relative to USD remains low.
average.
Market positions (AUD) Momentum

0.6 extended AUD longs 10

0.5 AUD overbought
0.4 5
0.3
0.2
0.1 0
0.0
-0.1 -5
-0.2
-0.3 extended AUD shorts -10
-0.4 AUD oversold
-0.5
-15
30-Oct
10-Jul

7-Aug

2-Oct

19-Feb
4-Sep

27-Nov

16-Apr
12-Jun

14-May
22-Jan
25-Dec

19-Mar

24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May

CFTC net long/open interest stdev(+2) stdev(-2)

Momentum stdev(+2) stdev(-2)

The market continued to add net short AUD speculative position. AUD momentum is showing an oversold condition.

3 June 2013 13
Barclays | The FX Quantitative Analyzer

AUD/USD VOLATILITY
Barclays PCA fair value (z-scores) Implied vol, 3m rolling actual vol, and GARCH forecast

2.0 45
Implied 3-m vol
1.5 40 historical 3-m vol
1.0
35 forecasted 3-m vol, GARCH(1,1)
0.5
30
0.0
-0.5 25
-1.0 20
-1.5
15
-2.0
1m 2m 3m 6m 9m 1y 2y 10

PCA z-score stdev(+1.64) stdev(-1.64) 5

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Vol is neither cheap nor expensive, according to our PCA model. Implied vol is above realized vol and our GARCH (1,1) forecast.
Probability distributions of spot outcome in three months ATM volatility and kurtosis of distribution

10 1.9 15%
Implied Probability
9 Distribution 14%
1.7 13%
8
Lognormal PDF 1.5 12%
7 11%
6 1.3 10%
5 9%
1.1 8%
4
0.9 7%
3 6%
2 0.7 5%
1-Aug

1-Oct
1-Jul

1-Feb
1-Nov

1-Apr

1-May
1-Jun

1-Jan
1-Sep

1-Dec

1-Mar
1
28.51% 40.23%
0
0.64

0.69

0.74

0.78

0.83

0.88

0.93

0.98

1.03

1.08

1.12

1.17

1.22

1.27

Kurtosis (LHS) ATM Implied Vol (RHS)

The market prices a 25.03% probability that spot will be below 1.00 Implied volatility has risen, while kurtosis has fallen.
in three months, versus a 29.21% likelihood that it will be above
1.03 (Reference 3m-fwd:1.0161 st dev).
Forward-forward implied volatility curve Implied and actual correlation

11.5 100%

11.0 80%

10.5 60%

10.0 40%

9.5 20%
2009

2010

2011

2012

9.0
3m Today 3m-3m F 3m-6m F 3m-9m F Implied 3-m correlation between EUR/USD and AUD/USD
90 day rolling actual correlation
31-May-13 24-May-13 17-May-13

The forward-forward volatility has moved higher on the week. The implied correlation of the AUD/USD and EUR/USD is stronger
than realized correlation.

3 June 2013 14
Barclays | The FX Quantitative Analyzer

NZD/USD SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

3 3m LIBOR sprd d(3m LIBOR sprd)

d(1Y-3m sprd) d(10Y-1Y sprd)
2 NZD overvalued dlog(rel equity returns) dlog(MSCI world)
1.5 dlog(CRB)
1
1.0
0
0.5
-1

-2 0.0
NZD undervalued
-3 -0.5
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May
-1.0
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

NZD/USD is trading significantly below our fair value estimate. The fall in spot (-1.6%) was larger than the decline in FFV
(-0.7%), which was driven mainly by interest rates (-0.6%) and
CRB (-0.2%).
Market sentiment (skewness of prob. distrib. of return) Momentum

-0.3 15
-0.4 NZD overbought
NZD bullish sentiment
-0.5 10
-0.6
5
-0.7
-0.8 0
-0.9
-1.0 -5
-1.1
NZD bearish sentiment -10 NZD oversold
-1.2
-1.3 -15
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May

24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
Skewness stdev(+2) stdev(-2) mean Momentum stdev(+2) stdev(-2)

The option-implied sentiment on the NZD is slightly bearish. The NZD bullish momentum is showing an overbought condition.

3 June 2013 15
Barclays | The FX Quantitative Analyzer

EUR/NOK SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

3 1m LIBOR sprd d(1m LIBOR sprd)

d(1Y-1m sprd) d(10Y-1Y sprd)
NOK undervalued dlog(rel equity returns) dlog(MSCI world)
2
2.0 dlog(WTI)
1
1.0
0

0.0
-1
NOK overvalued
-2 -1.0
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May
-2.0
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

EUR/NOK is trading above our fair value estimate and deviation The rise in spot (1.1%) was smaller than the increase in FFV
remains elevated. (1.4%), which was driven mainly by interest rates (1.2%), relative
equity return (0.1%) and oil prices (0.1%).
Market sentiment (skewness of prob. distrib. of return) Momentum

0.5
1 NOK oversold
0.4
NOK bearish sentiment
-1
0.3

0.2 -3

0.1 -5
NOK bullish sentiment
0.0 -7
NOK overbought
-0.1 -9
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr
1-Jun

3-May
8-Mar

31-May

24-Aug

19-Oct
27-Jul

5-Apr
1-Jun

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May
Skewness stdev(+2) stdev(-2) mean Momentum stdev(+2) stdev(-2)

The option-implied sentiment on the NOK remains slightly bullish. The EUR/NOK momentum is close to neutral.

3 June 2013 16
Barclays | The FX Quantitative Analyzer

EUR/SEK SPOT
Barclays financial fair value model Contribution to weekly percentage change in fair value

4 1m LIBOR sprd d(1m LIBOR sprd)

d(1Y-1m sprd) d(10Y-1Y sprd)
3 SEK undervalued
3.0 dlog(rel equity returns) dlog(MSCI world)
2 dlog(WTI)

1 2.0

0
1.0
-1
-2 SEK overvalued 0.0

-3 -1.0
16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
27-Jul

21-Sep

14-Dec

5-Apr

3-May
1-Jun

8-Mar

31-May
-2.0
% deviation from FV stdev(+2) stdev(-2) 3-May 10-May 17-May 24-May 31-May

EUR/SEK is trading significantly above our fair value estimate. The rise in spot (0.3%) was smaller than the increase in FFV
(0.6%), which is mainly driven by interest rates (0.5%).
Market sentiment (skewness of prob. distrib. of return) Momentum

0.5 2
SEK bearish sentiment SEK oversold
0.4 0

0.3 -2
-4
0.2
-6
0.1
-8
0.0
-10 SEK overbought
-0.1 -12
SEK bullish sentiment
-0.2 -14
24-Aug

19-Oct

5-Apr
1-Jun

27-Jul

16-Nov
29-Jun

8-Mar

31-May
11-Jan

8-Feb
21-Sep

14-Dec

3-May

16-Nov
29-Jun

24-Aug

19-Oct

11-Jan

8-Feb
14-Dec

5-Apr
1-Jun

27-Jul

21-Sep

3-May
8-Mar

31-May
Skewness stdev(+2) stdev(-2) mean Momentum stdev(+2) stdev(-2)

The option-implied sentiment on the SEK is close to neutral. The EUR/SEK bearish momentum is showing an overbought
condition.

3 June 2013 17
Barclays | The FX Quantitative Analyzer

A PRIMER ON QUANTITATIVE ANALYSIS (QA)

Introduction
There has been a noticeable increase in interest in quantitative analysis (QA) in recent years. This is the result of a combination of
three factors. First, as currencies emerge as a new asset class, many investors have sought to extend modern portfolio theories
to currency investment. Second, many investors are contemplating a more systematic approach to currency investment,
especially as pressures to increase transparency and accountability grow. Third, many investors are looking for new quantitative
tools to supplement traditional technical analysis and help evaluate their investment decisions.

It is in answer to these new needs that we have conceived The FX Quantitative Analyzer, which we hope will be useful to our
clients. As this publication is an evolving project, we would welcome any feedback and comments.

What is QA?
Despite the growing interest in QA, it seems to mean different things to different people. (Moreover, the question of how it can
contribute to the investment process has been a constant source of confusion.) For the purposes of this publication, we have
decided to adopt a rather narrow definition of QA (partly reflecting our recognition of the limitations of QA, a point we will
elaborate on later) as the task of extracting information from asset prices. This information, in particular, pertains to notions of
fair value, to the markets directional bias, to the risk premium embedded in asset prices and to the behavior of volatility.

Limitations of QA
QA is not a silver bullet; it has several important limitations and, moreover, we believe that it is only when investors fully
understand these limitations can QA become a useful tool. First, one must always bear in mind that QAs ability to extract
information from the relationship between asset prices depends crucially on the stability of the relationship in question. Modern
statistical methods are quite helpless when confronted with structural breaks in financial data. Second, to the extent that QA is
primarily a study of past price movements, its ability to forecast future prices is low, notwithstanding the fact that some markets
do at times exhibit auto-regressive characteristics. Indeed, we are suspicious about any models that purport to forecast returns
tomorrow based on price movements today as, in our view, they invariably place too strong an assumption on the markets
speed in processing new information.

Our approach to QA
The goal of establishing fair value is a central aspect of our approach. Fair value is important because markets have a tendency to
overshoot (especially when market activity is dominated by trend followers), and overshooting provides opportunities for
contrarian investors. However, given that overvaluation and undervaluation can sometimes persist for a long time, we have
identified several additional indicators to help investors time their entries into trades better. These indicators include positioning,
momentum, and market sentiment that we use as supporting contrarian signals. A detailed discussion of the techniques that we
have adopted is contained in the technical appendix.

QA as complement to macro analysis

Given our scepticism of QA as a complete solution, we see it as a complement to macro analysis in producing trade
recommendations and forecasts. QA might tell us what the effect of a 25bp rate hike by the Fed might be on the EUR/USD, but
only careful macro analysis can give us an informed view on what the Fed is likely to do. At best, QA enables investors with an
articulated macro view to time their investment decisions effectively.

TECHNICAL APPENDIX
Available upon request (yuki.sakasai@barclays.com)

As of 31 May EUR/USD USD/JPY EUR/GBP EUR/CHF USD/CAD AUD/USD NZD/USD EUR/NOK EUR/SEK
Spot reference 1.296 100.98 0.855 1.244 1.034 0.959 0.797 7.628 8.615
FFV estimate 1.323 97.47 0.838 1.229 1.023 1.003 0.814 7.527 8.356
Source: Barclays Research

3 June 2013 18
Barclays | The FX Quantitative Analyzer

GLOBAL FOREIGN EXCHANGE RESEARCH

Global
Jose Wynne
Head of FX Research
+1 212 412 5923
jose.wynne@barclays.com

Global FX
Aroop Chatterjee Sebastian Brown Bill Diviney Michael Keenan
Head of FX Quantitative Strategy FX Strategist, Latin America FX Strategy South Africa/Sub-Saharan
+1 212 412 5622 +1 212 412 6721 +81 3 4530 5026 FX Strategist
aroop.chatterjee@barclays.com sebastian.brown@barclays.com bill.diviney@barclays.com +27 (0) 11 895 5513
mike.keenan@absacapital.com
Hamish Pepper Yuki Sakasai Chris Walker Nick Verdi
FX Strategist, Asia-Pacific ex-Japan FX Strategy FX Strategy FX Strategist, Asia-Pacific ex-Japan
+65 6308 2220 +1 212 412 5652 +44 (0) 20 3555 5863 +65 6308 3093
hamish.pepper@barclays.com yuki.sakasai@barclays.com chris.x.walker@barclays.com nick.verdi@barclays.com

Emerging Markets
Christian Keller Koon Chow Nigel Chalk Alejandro Grisanti
Head of Emerging Markets Research Head of EM Strategy Head of Emerging Asia Research Co-head LatAm Research
+44 (0)20 7773 2031 +44 (0)20 777 37572 +65 6308 2625 Economist ExBrazil, Chile, Mexico
christian.keller@barclays.com koon.chow@barclays.com nigel.chalk@barclays.com +1 212 412 5982
alejandro.grisanti@barclays.com

Guilherme Loureiro Marcelo Salomon

Economist Latin America, Co-head LatAm Research
EM Strategist Economist Brazil, Chile, Mexico
+55 11 3757 7771 +1 212 412 5717
guilherme.loureiro@barclays.com marcelo.salomon@barclays.com

3 June 2013 19
Analyst Certification
I, Yuki Sakasai, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject
securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.

Important Disclosures:
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"Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays
Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072.

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should
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